Meta

Recession: always and everywhere a monetary phenomenon?

Economic crisis lead to good things. One such thing, which I have been hoping for, is a new economic theory or area/branch. I am not sure what follows will be the new paradigm but I really like that something creative came out of this crisis.

Here is the abstract of the paper:
“Market Monetarism is the first economic school to be born out of the blogosphere. Market Monetarism shares many of the views of traditional monetarism but unlike traditional monetarism Market Monetarism is sceptical about the usefulness of monetary aggregates as policy instruments and as an indicator for the monetary policy stance. Instead, Market Monetarists recommend using market pricing to evaluate the stance of monetary policy and as a policy instrument. Contrary to traditional monetarists -­ who recommend a rule for money supply growth -­ Market Monetarists recommend targeting the Nominal GDP (NGDP) level. The view of the leading Market Monetarists is that the Great Recession was not caused by a banking crisis but rather by excessively tight monetary policy. This is the so-­called Monetary Disorder view of the Great Recession.”

From this it seems that in this theory recessions are always and everywhere a monetary phenomenon. I can live with that.

5 thoughts on “Recession: always and everywhere a monetary phenomenon?”

I think that as long as the price of money is common sense, according to the aggregate demand and supply from the real economy, the monetary policy is just an accessory, and never a phenomenon starter. Much less importnt than advertised. The actual system is quite ok, and I refuse anything that looks like a standard for money, or like a limitation of the money creation. The problem is that sometimes people working there don’t set the price for money according to the demand and supply from the real economy, because they are people, and this is what creates all sort of problems, plus freak theories, just like this one, but not only, all of them going to some extreme and non differentiating between countries, level of developments, and so on and so forth.

This means we don’t need a theory, but a central bank unable to set the price of money, obliged to take the price of money as it is on the MM of that country, like for instance robor in Romania, and allow the market to re-gain the equilibrium when they lose it. We need to allow all the banks in the system to make this price, according to their needs, their supply and demand, result a price, which will be more accurate and more proper for that economy, in that particular moment, because will result from reality, from the real need or not need of money. Not from a mathematical calculation, none of them being able to capture the real reality.

And the central bank will need to be an institution creating money with the Magic Stick every time I, or the state, or the baning system, ask for a loan, because we need those money for something. And also be there to keep a track of the system, and let us know when some bank risks going under.

So, as long as we allow a central bank to make a price for our money, which is wrong, we will always invent tones of theories, all of them good some times and somewhere, all of them bad, in other situations.

The only good theory I can accept is that it is much more about us then about them, that in any market of the earth a false price, not keeping the track with the real demand and supply, creates problems, so there’s no reason to believe that the interest rate is an exception, and the money are a commodity, that should be traded and priced freely, in the market. Inflation is not a monetary phenomenon, anyway. It doesn’t increase with credit, it doesn’t increase with the rate decreases, and it comes much more from the real economy than from the monetary policy. The statistics are the proof. So they are fooling us to justify their existence, they don’t target the inflation, but keeping its track, which is something different. This is an epiphenomenon, we confuse the cause with the effect :). They should continue to exist, but they shouldn’t have the right to set prices. Their role should be totally rethought..

I expect the day when somebody will create this theory, and will ask for support from our side :).

Or, at least, if they can’t let us free, they should set the interest rate according to the dynamics of Loans/Deposits, and nothing more or less. As long as we will insist in complicating things, we will always lose something from sight.